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The process for converting present values into future values is called compounding This process requires knowledge of the values of three of four time-value-of-money variables. Which of the following one of these variables? The interest rate (I) that could be earned by deposited funds The present value (PV) of the amount deposited The duration of the deposit (N) The trend between the present and future values of an investment All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 0percentage, 10percentage, 20percentage. Identify the interest rate that corresponds with each line. Line A: Line B: Line C: Investments and loans base their interest calculations on one of two possible methods: the interest and the interest methods. Both methods apply three variables-the amount of principal, the interest rate, and the investment or deposit period to the amount deposited invested in order to compute the interest. However, the two methods differ in their relationship between the variables. Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound Interest? PV = (1 + I)^N/PV PV = PV + (PV times I times N) PV = PV times (1 + I)^N Simple interest? FV = PV - (PV times I times N) FV = PV/(1 times I times N) FV = PV + (PV times I times N) Identify whether the following statements about the simple and compound interest methods are true or false. Statement All other factors being equal, both the simple interest and the compound interest methods will amount of earned interest by the end of the first year. After the end of the second year and all other factors remaining equal, a future value based compound interest will never exceed the future value based simple interest. The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods. True False Alek is willing to invest $30,000 for six years, and is economically rational investor. He has identified three investment alternatives (A B, and that vary in their method of calculating interest and in the annual interest rate offered since he can only make one investment during the six-year investment period, complete the following table and indicate whether Alek should invest in each of the investments.
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